Investing in higher-risk shares
Although all shares carry risk, investing in penny shares and non-listed companies can carry higher risks. Find out what you can do to help protect yourself.
Many people now invest in company shares, and there are many different types of companies you can invest in. As well as buying shares in large, listed companies, you can buy shares in smaller companies (these are sometimes known as ‘penny shares’), traded on markets such as the Alternative Investment Market (AIM) and the Plus Quoted Market.
You can also buy unlisted shares. These are often known as an Initial Public Offering (IPO) or pre-Initial Public Offering (pre-IPO). This is when a company wants to raise money and first offers shares to the public with the intention of becoming listed on a specific market at some future date.
Another type of high-risk investment is Contracts for Difference (CFDs). CFDs are very complex investments, see below.
You could be at risk if you have:
- bought these investments and not fully understood the risks involved (or have not had them adequately explained to you);
- been pressured into buying these shares by a broker; and/or
- been sold shares by a broker who did not consider your personal and financial circumstances when recommending them to you.
Although every share investment carries some degree of risk, investing in penny shares and non-listed companies carries a higher risk because:
- they are often smaller, growth companies without proven track records;
- there is sometimes a big difference between how much you pay for the shares and how much you can sell them for;
- it can be difficult to find a buyer for some shares – particularly unlisted shares. This could mean that you cannot sell them when you want to or that you have to accept a much lower price than you paid for them. Remember, even if a company wants to list its shares in the future, there’s no guarantee they will;
- shareholder influence can sometimes be limited because the majority of the shares may be closely held (e.g. by company directors);
- publicly available information may be less comprehensive than that provided by listed companies; and
- there is an increased risk you could lose some or all the money you invest.
These types of shares may be suitable for some investors but they are not for everyone.
More and more people are looking at new ways to make money and there has been a notable increase in investment into CFDs.
CFDs are highly complex and carry a high degree of risk to your money. It is possible to lose more than your initial investment, so make sure you fully understand the risks involved and seek independent financial advice if necessary. You should only take a risk with money you can afford to lose.
You may be contacted by a broker and recommended CFDs. Make sure you can answer “Yes” to all of the following questions. If you can’t, then CFDs may not be a suitable investment for you.
- Do you fully understand how CFDs work?
- Do you understand how you can make money and how you can lose money in these investments?
- Are you in a position financially to lose all, and possibly more, of the money that you are thinking of investing?
- Do you accept that the outcome of your investment may be that you will need to provide additional money if things go against you?
- If things do go against you, do you understand how much that could be and have you got funds to do this?
If you are thinking of investing into CFDs you should research these investments thoroughly before parting with your money.
What firms should do
When recommending higher-risk shares, firms have to make sure they are suitable for you. Before making recommendations to you they should ask questions about:
- your previous investment experience;
- how much you know about investments;
- your financial situation;
- why you want to invest; and
- how much you risk you want to take.
They should only advise you to invest if the information you provide shows that you are the type of person for whom this type of investment is suitable. Firms have to give you enough information so that you can make an informed decision. This means they have to explain clearly how the investment works, why it meets your particular needs, what the risks involved are and what that might mean for you.
How firms may contact you
One method firms use to get your contact details is to buy information from share registers. They may then call or write to you offering a free research report on shares you already hold and ask for your permission to contact you in the future with investment opportunities. Firms may also send direct offer financial promotions in the form of a document offering you shares in a company directly, which may also ask for permission to call you in future.
If you are not sure about whether you would want to invest, think carefully before giving your permission or investing directly in the companies you are sent offers for.
Firms are not necessarily breaking any rules contacting you in this way. But we expect them to take extra care to make sure they gather enough information about your personal circumstances before they recommend an investment they think is suitable.
Even if they are not recommending a particular investment to you, under FSA rules they may still have to make sure you have the knowledge and experience to understand the risks involved in any investment they tell you about.
Protect yourself
Do's
- Make sure you understand the risks involved in the shares you want to invest in.
- Make sure you are comfortable with the level of risk involved.
- If you buy high-risk or very high-risk shares, make sure you understand there is an increased risk you may lose some or all of your money.
- Ask the adviser questions if there is anything you are not sure about.
- Do some research. If the share is listed, try to find out what the current market price is for the shares you are offered. You can do this by looking in the financial press or checking the website of the market the share is listed on. Many of these firms may sell you shares which are already owned by other brokers or individuals rather than the shares being bought and sold through the market. Ask where the shares have come from. Look on the company’s website (if they have one), get a copy of their annual report and read the financial press.
- Challenge the advice and get clarification if you are not clear on the risks and the facts.
- Take your time and think carefully before investing.
Don'ts
- Don’t be pressured into buying any investment by anyone.
- Don’t be embarrassed to say no.
- If you are not sure about whether to invest, consider getting professional financial advice. See Getting help.
To find out more about how to protect yourself when buying over the phone, see On the phone and for information on Penny shares, see Penny shares.